Tax Matters

Tax Matters

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The American Taxpayer Relief Act - Tax Changes

The “American Taxpayer Relief Act” —
tax changes included in the fiscal cliff legislation


I’m sure you’ve heard and read about the New Year’s Day passage of the American Taxpayer Relief Act. Here is a rundown of the items that may affect you when we prepare your 2012 taxes and plan for 2013.


Individual tax issues

Payroll Tax Holiday: The 2% cut in the Social Security tax for all earners will not be extended into 2013. For wages paid on or after January 1, 2013, the Social Security tax will return to 6.2% (along with the Medicare tax) and the total employee share of the tax will be 7.65%. This means your paycheck will be 2% lower in January.

Tax Rates: Beginning in 2013, the top tax rate of 39.6% (up from 35%) will be imposed on individuals with taxable income of more than $400,000 a year, $425,000 for head of household, and $450,000 for married filing joint. These thresholds are indexed for inflation. Other than the top rates, other rates remain the same as 2012.

Capital Gain Rates: Beginning in 2013, the maximum capital gains tax will rise from 15% to 20% for individuals taxed at the 39.6% rate (taxable incomes above $400,000, $425,000, or $450,000 depending on filing status as noted above). The treatment of qualified dividends taxed at capital gains rates is made permanent. (Act §201(a))

AMT: No matter what you thought of the fiscal cliff issue, most of us are relieved to have final resolution to the annual problem of the Alternative Minimum Tax (AMT). Each year Congress has raised the exemption amounts to match inflation. This Act finally puts a permanent fix to the problem.

The amounts are permanently increased and contain an annual inflation adjustment. The 2012 exemption amounts are: $50,600 for unmarried taxpayers, $78,750 for joint filers, and $39,375 for married persons filing separately.

In addition, many refundable credits may be used to offset the AMT.

Phase-Out of Itemized Deductions and Exemptions: Beginning in 2013, Itemized Deductions and Personal Exemptions will be reduced for higher-income taxpayers. The phase outs begin at: $300,000 for Joint filers and a Surviving Spouse, $275,000 for Heads of Household, $250,000 for Single filers, and $150,000 for Married Filing Separate. Those who have Adjusted Gross Income at these levels will lose the benefit of itemized deductions and personal exemptions based on 3% of the excess.

This will play into our planning for 2013.

Other Benefits Extended: Many of the tax benefits we have been taking advantage of will continue. Here are a few of them:


Business provisions

The Act extends the Bonus Depreciation and special expensing (IRC §179) provisions for businesses. This will expand our choices when deciding how when to elect the Bonus Depreciation and how much §179 expense we should elect for this year.

Small business stock: The 100% exclusion of gain on the sale of qualified small business stock has been extended through 2013. California has a similar provision for exclusion of gain. However, that provision has been found unconstitutional and the FTB is disallowing exclusions taken in prior years. If you took advantage of this exclusion in the past four years, we will need to discuss this California turn of events.

Business Tax Credits: Many business tax credits that were set to expire will continue. We will talk about any that might benefit you and your business.

Energy Provisions:  Many of the energy credits, including the nonbusiness Energy Credits for energy-saving improvements made by individuals to their principal residence, have been extended. The $500 lifetime cap remains in place.

Estate Tax Provisions:  The Act permanently provides for a maximum estate tax rate of 40% for estates of decedents dying after 2012, with an exclusion of $5 million, adjusted annually for inflation using 2010 as a base year. The Act also provides a 40% tax rate and a unified estate and gift tax exemption of $5 million (inflation-adjusted) for gifts made after 2012. The exemption amount for 2012 is $5,120,000. Although it’s not yet released, the inflation-adjusted exclusion amount for 2013 is projected to be $5,250,00

This is a limited list of the provisions included in the Act.



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